S&P cuts rating on Belize

Posted on November 15, 2016

Standard & Poor’s has cut Belize’s sovereign credit rating deeper into junk territory highlighting a potential “further deterioration” in the central American country’s ability to service its debt.

The rating has been lowered from “B-” to “CCC+” and S&P is maintaining a negative outlook.

S&P warns that the government of Belize’s ability – or indeed willingness – to pay interest on its debts has become “more vulnerable” to external, financial and economic conditions.

It highlights that the country’s financial sector has lost correspondent banking relationships “which in turn has hurt the entire economy”. Correspondent banks carry out services on behalf of another financial organisation and are frequently used by domestic lenders for transactions abroad.

Only two of five domestic banks in the country have managed to maintain correspondent banking relationships and full banking services, S&P says. Even Belize’s central bank has lost three of its five correspondent banking relationships in the past two years, S&P says, adding that “finding replacement correspondents is very complicated”.

“The loss of these financial links could significantly impair activity in key sectors of the economy, including tourism and trade, and counteract efforts to reduce fiscal deficits,” S&P says.

The government’s deficit in the fiscal year that ended in March was estimated at 7.7 per cent of GDP following high spending on wages and compensation payments linked to utility companies nationalised in 2009 and 2011.

“We anticipate slow progress in lowering the fiscal deficit over the coming years,” S&P said in its ratings decision.

Meanwhile it expects net general government debt to rise to 81 per cent of GDP this year, up from 76 per cent in 2015.

Says S&P:

This heavy debt burden is a credit constraint, particularly given Belize’s narrow, open economy and fixed exchange regime. Interest payments currently stand at 9% of general government revenue, but we project they will rise toward 13.5% in 2019. Government debt servicing will increase in August 2017 as the coupon rate for Belize’s external bond due in 2038 (US$526.5 million at end-2015) rises to 6.767% from 5%, and it will again rise in August 2019 as principal payments start to come due.

Government debt is predominantly denominated in foreign currency and held by nonresidents. The government has not tapped global capital markets since its restructuring in 2012. It relies on shallow domestic capital markets and declining external financing from official creditors, following the fall in funding from Venezuela through its Petrocaribe program. We assess Belize’s contingent liabilities as limited.

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